Markets whipsawed violently in the aftermath of the Fed’s “less dovish than expected” rate hike, with European stocks sliding to 2 year lows, and Japanese stock entering a bear market as crude oil tumbled after another mini flash crash after the European open as the dollar slumped.
US equity futures initially rose, then tumbled sliding to a new 2018 low around midnight dragged lower by Asian market fears, then once again rebounded around the time EUrope opened, and were trading mostly flat as US traders walked in.
Investors “think the Fed has completely misjudged the situation and now it’s just a matter of just trying to find an exit while you can,” said Kyle Rodda, a market analyst at IG Group in Melbourne. “We’re probably entering a stage now where markets have got it their head that we’re preparing for quite sustained downside going into 2019.”
The sell-off that began Wednesday after Powell disappointed markets with a rate hike and a promise to keep reversing quantitative easing after downplaying the implications of market volatility, gathered pace in Asia and Europe. Markets were mostly spooked by Powell’s comment that the process of unwinding QE is on “autopilot.”
“The Fed’s been a huge friend of the stock market and they are now a little bit of an enemy” and will probably become a worse enemy before this is all over, Bob Doll, Nuveen chief equity strategist and senior portfolio manager, said on Bloomberg Television.
The enemy was revealed in European trading, where more than three-quarters of Stoxx Europe 600 members declined, with the index sliding to the lowest level since December 2016. Major European Indices are in the red, continuing from the declines seen in Asia which were spurred by US equity markets hitting YTD lows in reaction to the FOMC rate target hike; with EUR strength weighing on European equity markets as the dollar declines. FTSE 100 (-0.4%) is the outperforming index despite being weighed on by poor performance in the mining and materials sectors. Shell (-1.8%) is weighing on both the FTSE 100 and the AEX (-1.5%) which is the underperforming index, also impacted by semiconductor ASML (-3.3%) in the red after Apple’s poor performance yesterday. Sectors are firmly in the red, with the aforementioned materials sector lagging.
Earlier in the Asian session, Japanese stocks entered a bear market as the last policy statement of the year from the BOJ added to mounting investor concerns, sending the yen to its strongest since mid-September. The Topix index fell 2.5%, extending its decline after the BOJ kept its policy unchanged. Electronics makers and telecommunications stocks were the biggest drags on the benchmark gauge, which closed almost 21 percent below its January high.
Some investors thought the drop in Japanese stocks went too far. “This is an adjustment on the market from a strongly crowded position, especially on U.S. equities, to a more normal level,” said Frank Benzimra, head of Asia equity strategy at Societe Generale. “I’m surprised at the reaction of the Japanese market, which I find a bit excessive.”
USD/JPY fell below 112 for the first time since Oct.; the yen was supported amid concerns about slowing global growth after the Fed said it still intends to raise interest rates two more times next year; yields on super-long JGBs dropped to five-month lows after the Bank of Japan kept policy unchanged.
Elsewhere in currencies, the dollar fell broadly, with the BBDXY sliding back under 1,200 while treasuries held most of their steep gain from Wednesday.
Sweden’s krona rose against all Group-of-10 peers after a surprise interest rate hike by the Riksbank which raised its policy rate by 25 bps, as expected by 10 of 24 economists in a Bloomberg survey; the krona rose as much as 1% against the euro to a three-day high, before paring gains as traders digested a lowered rate projection.
In other central bank news overnight, the BoJ left monetary policy steady with short-term rate target at -0.1% and JGB yield target at around 0.0%; unchanged as expected. The Central Bank maintained pledge to buy JGBs in a flexible manner with holdings to increase at a pace of JPY 80tln per annum. Forward guidance was unchanged with BoJ stating it “will keep current extremely low rates for an extended period of time”. Board members Kataoka and Harada dissented on YCC as expected.
Also in Asia, the Hong Kong Monetary Authority raised rates by 25bps to 2.75% in lockstep with the Fed, as expected. HKMA stated that rising interest rates reflect normalization from a low-rate environment and more data in needed to determine if the local property market is in a downturn. Meanwhile, somewhat surprisingly the PBoC left interest and reverse repo rates unchanged, once again refusing to hike rates in lockstep with the Fed.
In another surprise move, the Swedish Riksbank raised rates for the first time in 7 years, to -0.25% vs. Exp. -0.5%. The bank’s forecast for the Repo rate indicates the next hike will likely occur in the second half of 2019. Deputy Governor Jansson dissented the rate hike, and did not support the repo-rate path in the monetary policy report. The Riksbank also sees the repo rate averaging 0.48% in Q4 2020, vs. Prev. 0.66% forecast and, 0.98% in Q4 2021, vs. Prev. 1.23% forecast. The bank noted that even though inflation has been lower than expected, conditions remain good for inflation to stay close to the inflation target going forward. The hike sent the SEK sharply higher against all of its peers.
After posting a modest rebound on Wednesday, oil once again tumbled, sliding more than 3 percent in New York. Brent (-3.4%) and WTI (-3.5%) have continued to decline as concerns over slowing global growth and supply concerns continue to
weigh on price; taking out USD 56 and USD 47 a barrel respectively. IEA’s Birol exerting additional pressure by stating that he does
not expect a sharp oil price increase in the short term, and he expects serious US oil production growth to continue until 2025. In
addition the El Sharara oil field is to reopen following the Libyan PM’s visit, although production has not yet restarted as workers
are awaiting orders from state oil Co NOC.
Gold is firmly in the green benefitting from safe haven flows following the weaker dollar post-FOMC. Aluminium prices in London
dropped to a 16-month low after aluminium producer Rusal confirmed that the US intends to lift sanctions on the Co which were
imposed in April. Separately, China’s aluminium firms are to meet to discuss falling prices and lower demand for the metal.
Expected data include jobless claims and November’s Leading Index. Accenture, Blackberry, Carnival, Walgreens Boots, and Nike are among companies reporting earnings
Market Snapshot
- S&P 500 futures little changed at 2,505.25
- STOXX Europe 600 down 1.2% to 337.29
- MXAP down 1.3% to 146.16
- MXAPJ down 0.9% to 474.60
- Nikkei down 2.8% to 20,392.58
- Topix down 2.5% to 1,517.16
- Hang Seng Index down 0.9% to 25,623.53
- Shanghai Composite down 0.5% to 2,536.27
- Sensex down 0.3% to 36,368.40
- Australia S&P/ASX 200 down 1.3% to 5,505.82
- Kospi down 0.9% to 2,060.12
- German 10Y yield fell 1.7 bps to 0.222%
- Euro up 0.8% to $1.1467
- Italian 10Y yield fell 16.3 bps to 2.413%
- Spanish 10Y yield rose 0.2 bps to 1.38%
- Brent futures down 2.8% to $55.64/bbl
- Gold spot up 1% to $1,255.60
- U.S. Dollar Index down 0.7% to 96.37
Top Overnight News from Bloomberg
- Fed Chairman Jerome Powell suggested he will be more cautious about raising rates next year after boosting them for the fourth time in 2018. “There’s significant uncertainty about both the path and the ultimate destination of any further rate increases,’’ he told a press conference
- The Bank of Japan left its stimulus settings unchanged at its final policy meeting of the year, with Governor Haruhiko Kuroda acknowledging that risks are tilted to the downside; Japanese stocks entered a bear market
- People’s Bank of China said it would supply lower-cost liquidity for as long as three years to banks willing to lend more to smaller companies, as policy makers roll out targeted measures aimed at shoring up the flagging economy
- New Zealand’s economy grew at half the pace economists predicted in the third quarter, suggesting inflation will remain subdued and raising the possibility the central bank may cut interest rates.
- Australia’s labor market softened a little in November in a setback for the Reserve Bank’s drive for higher wages and faster inflation
- Special Counsel Robert Mueller will be cautious about implicating President Donald Trump — or even a thinly disguised “Individual-1” — directly in criminal activity in legal filings he’s expected to issue in the next few months, according to people familiar with his investigation
- Soros Fund Management has reduced most of its macro wagers, moving away from the strategy that made George Soros a billionaire, according to people familiar with the changes
Asian equities drowned in a sea of red following the decline seen on Wall Street post-FOMC where the Dow, S&P 500 and Nasdaq all dived to fresh YTD lows and tech-giant Apple sunk over 3%. ASX 200 (-1.3%) was mostly pressured by the material sector as metals fell with the Fed-induced USD strength, similarly Nikkei 225 (-2.8%) retreated further below the 21,000 handle to levels last seen in September 2017 as its heavy mining sector slumped, while a firmer JPY further distressed the benchmark. Elsewhere, Shanghai Comp. (-0.5%) was weighed on by financial names (China Banks sector -2.3%) after the PBoC refrained from raising reverse repo rates following the FOMC and HKMA 25bps hikes. Meanwhile, Hang Seng (-1.0%) was pressured by the regional risk sentiment alongside weakness in the property and financial sectors, on the flip side, shares in Rusal provided the industrial sector with modest support after spiking higher in excess of 20% after the reports that US will terminated sanctions against the company.
Top Asian News
- China, Canada Said to Discuss Third Detainee’s Return, Post Says
- Asia Stock Carnage Deepens as Hopes Fizzle With Policy Updates
- Developer Jiayuan International Jumps By Record 25% in Hong Kong
- Bank Indonesia Pauses Rate Hikes as Fed Turns Cautious
- Emerging Markets Seen Coming Back From Dour 2018 Led by Brazil
Major European Indices are in the red [Euro Stoxx 50 -1.5%] continuing from the declines seen in Asia which were spurred by US equity markets hitting YTD lows in reaction to the FOMC rate target hike; with EUR strength weighing on European equity markets as the dollar declines. FTSE 100 (-0.4%) is the outperforming index despite being weighed on by poor performance in the mining and materials sectors with index heavyweights Anglo American (-3.1%), Rangold Resources (-2.6%) and Rio Tinto (-2.6%) in the red. Shell (-1.8%) is weighing on both the FTSE 100 and the AEX (-1.5%) which is the underperforming index, also impacted by semiconductor ASML (-3.3%) in the red after Apple’s poor performance yesterday. Sectors are firmly in the red, with the aforementioned materials sector lagging. Other notable movers include Wirecard (-3.7%) who are at the bottom of the DAX (-0.9%) following a article stating the Co only has a 5-10% share in German online transactions
Top European News
- U.K. Retailers Get Black Friday Boost as Sales Surge
- Bang & Olufsen Loses Quarter of Its Value on Lower Forecast
- Societe Generale to Take $123 Million Charge on Serbia Sale
- London Gatwick Airport Shut by Drone Scare Amid Holiday Rush
- After Brexit and Italy, Poland Shows Cost of Clashing With EU
In FX, the Dollar has recoiled sharply from initial recovery highs seen after the Fed delivered its latest 25 bp hike, but not quite the dovish future guidance that most seemed to be anticipating. However, 2019 dot plots were trimmed to 2 from 3, the neutral rate was shaved to 2.8% from 3% and the accompanying statement was tweaked to a degree in terms of the amount of further policy normalisation in the current cycle. Hence, on reflection the FOMC has shifted towards a more cautious stance, and this was
highlighted by Chair Powell in the post-meeting press conference, particularly with regard to subdued if not expressly declining inflation pressure. The upshot, an unwind and part-reversal in the Usd and index through pre-FOMC lows around 96.200.
- SEK – In stark contrast to the Greenback’s relatively abrupt U turn, the Swedish Crown received a semi-surprise boost from the Riksbank that raised the repo rate by ¼ point against majority, albeit not unanimous by any means market expectations. Indeed, Eur/Sek has tested 10.2500 vs almost 10.3700 at one stage ahead of the contentious final policy meeting of the year, even though the decision to hike was contested by one Board member and came with a shallower projected tightening path out to 2021.
- EUR – The single currency is heading gains vs the back-pedalling Usd and finally cleared recent highs just ahead of 1.1450 on its way to circa 1.1485 and mega option expiries/barriers at 1.1500 (5.6 bn) that also coincide with early November peaks
- CHF/GBP/JPY – All benefiting from the aforementioned Dollar demise, with the Franc breaching 0.9900 resistance and perhaps also aided by a widening Swiss trade surplus. Similarly, Cable has overcome a sticky level around 1.2650 to briefly peer above 1.2700 despite ongoing Brexit uncertainty and helped in part by a strong pre-Xmas UK retail sales update, but highly unlikely to derive any further purchase from the BoE that is unanimously seen standing pat. Meanwhile, broad risk-off sentiment/positioning and even flatter yield curves have sparked strong demand for the Jpy that has now rallied through 112.00 to just over 111.70, even though Japanese monetary authorities are monitoring the situation and BoJ Governor Kuroda maintains the option of further easing if needed following an unchanged final policy meeting of the year.
- AUD/NZD/CAD – The Aud is markedly outperforming vs its fellow non-US Dollars, albeit within a significantly lower range vs its US counterpart around 0.7100, as the Kiwi is undermined by much weaker than forecast Q3 GDP overnight and ANZ’s dovish call for a 25 bp RBNZ rate cut. Nzd/Usd is languishing below 0.6800 and the Aud/Nzd cross is back over 1.0500 accordingly. Elsewhere, sliding crude prices and the Canadian-Chinese diplomatic situation continues to weigh heavily on the Loonie, but the Cad has rebounded from 1.3500+ lows to circa 1.3450.
- EM – Regional currencies now all in the ascendency vs the Usd and regaining lost ground after the initial Fed fall-out and rout in risk assets.
In commodities, Brent (-3.4%) and WTI (-3.5%) have continued to decline as concerns over slowing global growth and supply concerns continue to weigh on price; taking out USD 56 and USD 47 a barrel respectively. IEA’s Birol exerting additional pressure by stating that he does not expect a sharp oil price increase in the short term, and he expects serious US oil production growth to continue until 2025. In addition the El Sharara oil field is to reopen following the Libyan PM’s visit, although production has not yet restarted as workers are awaiting orders from state oil Co NOC. Gold is firmly in the green benefitting from safe haven flows following the weaker dollar post-FOMC. Aluminium prices in London dropped to a 16-month low after aluminium producer Rusal confirmed that the US intends to lift sanctions on the Co which were imposed in April. Separately, China’s aluminium firms are to meet to discuss falling prices and lower demand for the metal.
US Event Calendar
- 8:30am: Philadelphia Fed Business Outlook, est. 15, prior 12.9
- 8:30am: Initial Jobless Claims, est. 215,000, prior 206,000; Continuing Claims, est. 1.66m, prior 1.66m
- 9:45am: Bloomberg Consumer Comfort, prior 59.4; Bloomberg Economic Expectations, prior 56
- 10am: Leading Index, est. 0.0%, prior 0.1%
via RSS https://ift.tt/2Cq24Ma Tyler Durden